Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,620,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses: of-pocket costs Depreciation $ 5,000,000 2,240,000 2,760,000 Advertising, salaries, and other fixed out- $ 860,000 1,124,000 Total fixed expenses 1,984,000 $ 776,000 Net operating income Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the project's net present value? 2. What is the project's internal rate of return to the nearest whole percent? 3. What is the project's simple rate of return? 4-a. Would the company want Casey to pursue this investment opportunity? 4-b. Would Casey be inclined to pursue this investment opportunity? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4A Req 4B What is the project's net present value? (Round your final answer to the nearest whole dollar amount.) Net present value
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,620,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales Variable expenses Contribution margin Fixed expenses: of-pocket costs Depreciation $ 5,000,000 2,240,000 2,760,000 Advertising, salaries, and other fixed out- $ 860,000 1,124,000 Total fixed expenses 1,984,000 $ 776,000 Net operating income Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the project's net present value? 2. What is the project's internal rate of return to the nearest whole percent? 3. What is the project's simple rate of return? 4-a. Would the company want Casey to pursue this investment opportunity? 4-b. Would Casey be inclined to pursue this investment opportunity? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4A Req 4B What is the project's net present value? (Round your final answer to the nearest whole dollar amount.) Net present value
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division's return on
investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would
require a $5,620,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is
19%. The project would provide net operating income each year for five years as follows:
Sales
Variable expenses
Contribution margin
Fixed expenses:
of-pocket costs
Depreciation
$ 5,000,000
2,240,000
2,760,000
Advertising, salaries, and other fixed out-
$ 860,000
1,124,000
Total fixed expenses
1,984,000
$ 776,000
Net operating income
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the project's net present value?
2. What is the project's internal rate of return to the nearest whole percent?
3. What is the project's simple rate of return?
4-a. Would the company want Casey to pursue this investment opportunity?
4-b. Would Casey be inclined to pursue this investment opportunity?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2
Req 3
Req 4A
Req 4B
What is the project's net present value? (Round your final answer to the nearest whole dollar amount.)
Net present value
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